Collusion is expressly forbidden by law since it unfairly benefits the cartel (although not necessarily its customers), while hurting the broader market. Watch the presentation or visit us for more information at https://bit.ly/3vgG5iR

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K N O W A B O U T ( T R A D I N G ) C A R T E L ?
At least outwardly, the giants of investment banking — the big Wall Street
titans and other financial institutions (FIs) — are rivals, competing over
customers, returns, trading talent, and more. But over the years there
have been multiple cases in which banks have been accused, and found
guilty, of colluding or price rigging in conjunction with one another.
For example, in May 2021 seven FIs, including Bank of America, Natixis,
Nomura, RBS, UBS, UniCredit and WestLB, were found guilty by the
European Union of colluding in a way deemed to hurt EU Member states.
Three of the FIs were fined a collective total of $453 million for their part
in the wrongdoing. Employees at the FIs in question had participated in a
bonds trading cartel, in which traders used chat rooms to share sensitive
information with one another that they could use to inform how they bid
at debt auctions. The incidents took place between 2007 and 2011.

2. This is far from an isolated incident. A decade ago, two separate lawsuits
alleged that banks J.P. Morgan Chase & Co. and HSBC Holdings were
manipulating silver futures by colluding and informing one another of
upcoming big trades, flooding the market with a disproportionate
quantity of orders.
One of the largest recent such incidents was the Forex scandal in which
dozens (although potentially hundreds) of traders from at least 15 banks,
including Barclays, HSBC, and Goldman Sachs, participated in online
chatrooms — with names like The Cartel and The Mafia — in which they
discussed the volume and kinds of trades they were planning to make.
This manipulation of the Forex market may well have continued for years.
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Cartels in action
This kind of sharing of illicit information —
frequently using electronic communications
for coordinating the behavior — is frequently
referred to as being a cartel. While the name
“cartel” might summon up images of drug-
running outfits and gangland activity, it
refers to any collection of independent
businesses which collude with one another
in a way that manipulates prices of a product
or service.
Under normal circumstances, a FI will decide its strategy in order to
maximize its profits, by choosing its investments, quantities, and more.
However, it does this without considering the effect of its decision on
other firms. In other words, it’s operating in isolation for the good of itself
and its customers. Contrast that to a cartel, whereby FIs consider not just
how particular strategies will affect themselves.

3. Cartels are bad news for customers, but they’re also bad news for firms.
When discovered, they can result in heavy fines for the firms involved —
even if they may have not been aware of the existence of the cartel. In
some cases, it may only be a small number of bad actor traders acting in
isolation but can nonetheless result in multimillion-dollar fines or other
penalties. In 2019, the European Commission fined FIs including Barclays,
Citigroup, the Royal Bank of Scotland, JPMorgan, and Japan’s MUFG Bank
a massive 1.07 billion euros ($1.2 billion).
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The right tools to defend against cartels
FIs today must make sure that they closely
monitor all comunication channels employed
by traders, along with trading information, to
ensure that there is no behavior that falls
under the remit of collusion. Fortunately, this
is becoming easier to do thanks to advanced
tools, such as the ones we have developed
at Shield, that combine boosted lexicon
technologies and artificial intelligence
algorithms to spot behavior suggestive that
rule-breaking behavior is going on.
These tools can spot a wide range of potential market abuse scenarios,
ranging from collusion and insider trading to front running. By monitoring
for this behavior, and making it easy to generate (useful) alerts with
minimal false positives, FIs can protect themselves from the damaging
effects of cartel behavior.
And, in the process, better comply with increasingly tight regulations
seeking to hammer wrongdoers.